With regulators putting more pressure on providers of small, high-interest loans, it has become more vital than ever to provide services for "underbanked" borrowers. The crackdown on payday lenders has spawned fears of reduced access to credit for low-income consumers, and so regulators are trying to create safer alternatives to expand access to the banking system.
The Federal Deposit Insurance Corp. (FDIC) recently convened an advisory panel to consider how to reduce the number of unbanked and underbanked borrowers. Officials presented a new paper on how the use of mobile phones could broaden banking access. It recommended steps to bridge the delivery of mobile services with the payment methods often used among underbanked consumers, such as checks and money orders. The paper called for further study of cases where banks successfully created mobile service platforms that can be used by consumers on the fringes of mainstream banking.
Following the Office of the Comptroller of the Currency, the FDIC also released new rules for banks' deposit-advance products, and banks responded by announcing the end to certain offerings. Bankers and industry representatives have complained that the U.S. government's "Operation Choke Point," which forced many banks to cut ties with online lenders accused of consumer violations, has narrowed consumers' product choices. The Consumer Financial Protection Bureau (CFPB) "is the next shoe to drop in terms of establishing clarity about the small-dollar lending marketplace," says Paul Leonard, director of the California office for the Center for Responsible Lending. "Many institutions are probably waiting to see what the CFPB does in terms of its small-dollar regulations."
The FDIC has released a product template for banks to consider. The template includes loans with terms of at least 90 days, a 36 percent cap on annual percentage rates, low or zero fees, and a streamlined underwriting process. The challenge is whether such a product would be profitable enough for banks outside of the pilot to offer it. Other product ideas include secured cards, or credit cards secured against a borrowing limit that corresponds with the amount of funds in a customer's bank account that serves as collateral.